Economics and Related Topics

Category Archives: Development

Common conjectures on oil rich nations is that they have rampant despotism, militarism and general lacking of democratic institutions. This is mostly due to the examples set by Iraq, Saudi Arabia, Venezuela, Iran, Qatar, and Libya to name a few. But there are some rich countries with what can be seen as good governmental forms that are rich in oil. For example, one can just look at the US, Canada, and Norway as examples. Frequently conflicts amongst the former list of nations surrounds natural resource. This leaves one to wonder if their lack of democratic reform and general economic develop is linked to the abundance of oil.

Analyzing any data could create issues of endogeniety. This mostly comes from what are the expected tenures of despots, how their organization is structured, level of economic freedom within the country, whether the state extracts the oil or not, the rate of oil exploration, war in neighbouring countries, etc. Any of these can in many ways create issues when analyzing panel data of oil extraction, conflict, oil reserves, oil revenues, and so on.

Interestingly enough the general result on democracy and oil from panel data, from Robert Barro, shows a negative correlation between democracy and natural resource production. Which is dummied by oil.

Ross (2001) is even more interesting since it really brings the question of whether “Oil Hinders Democracy” directly to the headline. My conjecture on how the hindrance of democracy occurred relied on the simplification of dictatorial regimes as bandits. Supposing a bandit found a source of wealth to extract from but didn’t want to break enough law to get removed. The existence of oil would attract bandits to government, wherein they would “unjustly” extract the oil for themselves until no profits are to be gained. Essentially, dictators stay in power until a revolution or the profit to be earned is non-existent.

Ross uses a similar concept to the one from my conjecture. He defines “Rentier States” as states that depend on rents from oil. I suppose one can describe dictators as bandits, which is a stone’s throw away from “Violent Rentier”. The “Rentier State” is tested by Ross by adding to his model taxation and government consumption. This is to see if the government itself depends on regular taxation or extraction of oil profits.

The overall results Ross shows are fairly strong and seem to be replicated by Tsui (2011). Ross also finds, similar to Barro, that generalizing from oil to natural resources by including mineral resources shows that indeed they too can impede democracy. Cases like Chile, Angola, and Cambodia ring true. Broadly, the hindrance of democracy is far more common in poor states, after controlling for developed Western states Ross’s results show that oil rich poor states are especially in danger. In Ross’s testing he considers the change in regime if oil worth $10 Billion is discovered (figure 2). The results are chilling in a sense, as clearly seen a country like Canada or US with ~45,000 in income per capita sees no fall in democracy.

What if any implications does this have? I certainly am stumped. One could thank years of good economic institutions for the democracy in OECD nations. Much of growth literature over the years has been surrounding the institutions left over after the colonialism and WWII. The MENA region for this reason may continue to suffer from escaping rentier dictators if the rents are easy to take hold of.